Narayana Kocherlakota has an editorial that was published on Bloomberg today, titled Janet Yellen is Her Own Best Successor. He starts it off advocating for Janet Yellen to be reappointed as the Chairperson for the Fed:
President Donald Trump has reportedly begun the process of deciding who will lead the U.S. Federal Reserve after Janet Yellen’s term ends early next year. If he wants the best outcome for the economy, he can’t do better than Janet Yellen.
While I agree with most of points made in the editorial, I must beg to disagree with this quote for all of the reasons Kocherlakota brings up himself:
In short, Yellen’s policies have contributed to a surprisingly strong labor market recovery, yet also been sufficiently cautious to keep inflation below target. Some would see this as an all-around success, though the Fed’s caution does have a downside: Markets appear to believe that the central bank is unwilling or unable to hit its inflation target with consistency. Prices of Treasury bonds suggest that investors expect the Fed’s preferred measure of inflation to remain well under 2 percent five to 10 years from now. If it persists, this loss of credibility means that the Fed will have less ammunition to fight the next recession.
Scott Sumner, in a post recently, asked if the Fed is evil or misguided, going on to discuss the ways that undershooting the target for five years could lead to arguments for either (choosing to take the side of misguided rather than evil). While refusing to split hairs on the characterization of the issue, as it is possible for the Fed to be unintentionally both at once, I can split hairs on value. And I think that going with the known quantity, with all of its faults, at the very least will not undo perceived harm of the present. It’s likely true that having pneumonia is better than, say, having that in addition to botulism. And it’s probably more likely to have both with the other mentioned picks than if Trump goes for Yellen.
But suppose I want to get over the pneumonia, and I want to be able to get out of bed and live a normal life, or at least what I remember as “normal”. It wouldn’t be enough to stay away from the other quacks with the leeches. I would have to look for a better doctor than Doc Yellen who treats symptoms I don’t even have.
My personal view is that the timing and methods of the first few rate hikes left us hanging on the edge of recession. Inflation, fuel prices, consumer spending, retail sales, and other bellwethers have been receding the last couple of months, looking like the makings of a mini demand shock, and the last hike came with the added bonus of a promise to shrink the base with OMOs. Is it such a good job after all to be able to hike rates with out causing outsized damage even though the need for hikes is not justifiable? I think not.
I’ve got much better things to do with the next four years than living on the edge of recession for no reason other than elites’ obsession with the level of the FF rate and the size of the balance sheet, two factors that in themselves are near meaningless.
Common wisdom says that if it isn’t broken, don’t fix it – but here we are on the precipice of having the “it could be worse” fixer-upper renominated even though the indicators we look at represent much more than numbers on a chart. They represent real people who are being harmed for no good reason. We would do better to explain the inflation and employment situation in Japan in order to counsel Trump on his choice than simply acquiescing to the point that the present could be worse – because the remarkable points of the present are likely in spite of the Fed, not because of it.